Kirjner’s thesis is based on the idea that the Street is underestimating Facebook’s ability to beat revenue expectations in the coming years. He expects the company to deliver “$6,976 million in 2013, 9% higher than consensus’ $6,388 million, and $8,650 million in 2014, or 7% higher than consensus’ $8,078 million.” Much of this growth, he believes, will come from the firm’s ability to monetize mobile, a big concern for investors, as well as further monetization of the News Feed feature for PC users.

Kirjner writes that Facebook’s multiple, currently at 10 times 2014 EBIDTA estimates, will expand to 15 times once the company has proven its ability to beat expectations.

He also notes that once Facebook has shown it has monetized mobile users, as well as features like News Feed and Facebook Exchange, that should give it breathing room to develop new revenue streams over the next two years, for example expanding gifts, or partnering with major advertisers, such as Datalogix and Nielsen, so as to better quantify its advertising power (and ultimately boosting pricing).

Still, Kirjner admits that investing in the firm isn’t for the faint of heart: “Facebook remains a risky investment, dependent on the long-term and yet-unproven success of social advertising, the realization of the platform opportunity, and the potential to develop new businesses. We believe the potential for increasing monetization of the (mobile and PC) Newsfeed is enough to support growth till mid-to-late 2014. After that, we believe continued growth will depend on Facebook’s ability to i) refine its ad targeting or introduce new ad products to make ads more relevant (and hence not a distraction or nuisance) so that they do not have detrimental impact on user experience and engagement, thus creating ‘room’ for more ads in the (mobile) Newsfeed; ii) establish the value of social ads as fundamentally better than regular display advertising, thus commanding higher (and increasing) CPM; iii) develop new, meaningful, sustainable, and growing revenue streams, e.g., gifts, content distribution, an ad network or a yet-to-be-defined business; and/or iv) succeed in becoming the “social utility” of the Web through its platform play and monetizing this yet-to-be-built privileged position. None of these is easy (far from it!). If Facebook fails to get enough traction in the next 12-18 months in enough of these initiatives, it may not reach (or remain at) our target price, as its long-term growth prospects would dim. That said, with the stock trading at $24, we see much more upside than downside over the next 12 months, given that our conservative assumptions on revenue trajectory imply a revenue beat, and given the upside potential from Facebook’s distinctive assets.”

Elsewhere, Topeka Capital’s Victor Anthony reiterated his Buy rating and raised his price target by $2 to $36 on the stock. He also feels that the two major overhangs for the stock—worries about Facebook’s ability to monetize mobile users and the expiration of lock-ups for insiders—have largely passed, and thus investors will be able to more clearly see the positives.

Gifts are the major theme in his note. He writes that the company will soon be able to expand its offerings, and that the process is simply enough to attract consumers.

Expecting ecommerce to become a greater part of the company’s future, he incorporated this into his model: “We assume a 12% commission rate throughout the forecast period, a $30 ASP in North America/$15 int’l, each growing 5% annually, and in 2014, 3% NA/1% Int’l% of the user base would shop on FB, growing at 1% per year. In 2014, we estimate that FB could generate approximately $800mm in incremental revenues and $330mm in incremental EBITDA from e-commerce.”

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There are 2 comments

NOVEMBER 27, 2012 12:33 A.M.

Anonymous wrote:

FB is starting putting ads into personal feeds and users do not like it. The revenue surge may be short as users will look for other platforms to congregate.

NOVEMBER 27, 2012 1:08 P.M.

Anonymous wrote:

is this column going to ever be anything more than cut n' paste for you?
How about this:
"After falling more than 40% from its recent IPO start, analysts are beginning to weigh in with renewed Buy ratings in order to prop up the losses in ther trading book. They give various reasons why FB should jump as much as 30%, but after pounding the table for its IPO it nows understandable that they have to recoup some of their losses"

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.